Bitfinex, the biggest USD to Bitcoin exchange in the world, has been having serious banking troubles recently. First, it was revealed that they had severed ties with their primary bank, the Noble Bank of Puerto Rico, while simultaneously they were keeping the exchange running via a private account at HSBC. Then Bitfinex halted all fiat deposits, indicating that they had perhaps lost functionality in their bank account. Now prices of Bitcoin on Bitfinex have surged to a premium of USD 1,000 versus the global market, and the Tether (USDT) stablecoin which is intimately tied to Bitfinex has seen prices crash well below parity with USD.

The #1 stablecoin, USDT previously peaked at a market cap of USD 2.8 billion. However, USD 320 million worth USDT has been removed from circulation, which is something that could only occur via the redemption process where USDT is directly exchanged for USD via Tether Limited. On 15 October 2018, the price of USDT crashed to as low as USD 0.925, far below parity with the USD, removing another USD 80 million from USDT’s market cap in the process. The only way this makes sense is if Tether’s redemption process has begun to fail, perhaps due to the USD 320 million of USDT redemption in the past week causing a run on their bank. It is nonsensical that anyone would sell USDT so far below the value of the USD unless it is no longer backed by USD at this time.

This would suggest that the mechanism of global arbitrage has failed and that Bitcoin cannot be sold easily for fiat on Bitfinex anymore, which suggests fiat withdrawals are no longer working. Users are choosing to buy Bitcoin at a high premium on Bitfinex to get their money off the platform. Something similar happened when Mt. Gox collapsed, which was the biggest USD to Bitcoin exchange during the early days of Bitcoin. The Bitfinex subreddit is filled with complaints that fiat withdrawals are not working.

Despite all of these market and community indicators which suggest the Bitfinex situation is rapidly worsening, Bitfinex released a statement on 15 October declaring that all fiat withdrawals are working fine and fiat deposits will be working by 16 October.

It is hard not to make a comparison to Baghdad Bob, who declared during the Iraq War that American tanks were not in Baghdad when they were only a few hundred meters from his location, and sounds of approaching American troops could be heard while he said that.

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